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Clarifying COMI: Ontario Superior Court of Justice clarifies the test for determining a debtor’s center of main interest

In Re LightSquared LP, the Ontario Court of Superior Justice [Commercial List] (the “Canadian Court”) refined the test for determining the location of a debtor’s center of main interest (“COMI”) under Part IV of the Companies’ Creditors Arrangement Act (the “CCAA”), which is the Canadian equivalent of Chapter 15 of the U.S. Bankruptcy Code.

LightSquared LP (“LSLP”) together with approximately 19 of its affiliates filed for Chapter 11 protection (the “Chapter 11 Debtors”) in the U.S. Bankruptcy Court for the Southern District of New York (the “U.S. Court”) on May 14, 2012. All but four of these affiliates had their head office or headquarters in the U.S.

The Chapter 11 Debtors were in the process of building a fourth generation long-term evolution open wireless broadband network that incorporates satellite coverage throughout North America, with consolidated corporate offices in New York and Virginia. The Chapter 11 Debtors were the first private enterprise to offer mobile satellite services throughout North America and provided services, including data, voice, fax and dispatch services, to companies and governments as wholesale bandwidth purchasers.

The Chapter 11 Debtors included three Canadian entities, LightSquared Corp (a Nova Scotia incorporated company), and SkyTerra Holdings (Canada) Inc. and SkyTerra (Canada) Inc. (Ontario incorporated companies). These Canadian entities either held the regulated assets which are required by law to be held by Canadian entities, including a satellite, various licences and contracts, and were also to provide mobile satellite services to customers located in Canada based on products and services that were developed by the Chapter 11 Debtors. These entities were wholly owned subsidiaries (direct or indirect) of LSLP.

On May 15, 2012, the Canadian Court granted interim relief staying proceedings against the Chapter 11 Debtors and various other ancillary relief, and scheduled a full hearing on May 18. On May 18, 2012, the Canadian Court granted an order recognizing the U.S. proceeding as a “foreign main proceeding” and LSLP as the “foreign representative”. The Canadian Court noted that the U.S. Court would be further considering LSLP’s status as foreign representative, and therefore the Canadian Court reserved the right to amend its order if LSLP’s status were changed by the U.S. Court.

A proceeding under the CCAA can only be recognized as a “foreign main proceeding” if there is a foreign representative in connection with a foreign proceedings and the debtor’s COMI is in the foreign jurisdiction. The Canadian Court had no difficulty coming to the conclusion that a Chapter 11 proceeding is a foreign proceeding, and, subject to the potential that the U.S. Court might reconsider its decision, that LSLP was a foreign representative.

The Canadian Court noted that in circumstances where it is necessary to go beyond the presumption in s. 45(2) of the CCAA that a debtor’s COMI is at the location of its registered office, the following three factors, considered as a whole, should be assessed in determining COMI: (i) the location is readily ascertainable by creditors; (ii) the location is one in which the debtor’s principal assets or operations are found; and (iii) the location is where the management of the debtor takes place.

The Canadian Court stated that in most cases, these factors will indicate a single location as the COMI of the debtor, but in some circumstances a more careful analysis of the facts will be necessary. In all cases, the purpose of the review is to “determine that the location of the proceeding, in fact, corresponds to where the debtor’s true seat or principal place of business actually is, consistent with the expectations of those who dealt with the enterprise prior to the commencement of insolvency proceedings”.

The Canadian Court noted that Part IV of the CCAA does not specifically take into account corporate groups. Hence, it is necessary for a court to consider COMI on an entity by entity basis.

The Canadian Court observed that a review focused on the actual and perceived location of the management of the debtor’s business is consistent with the preliminary commentary provided in the Report of UNCITRAL Working Group V on rebutting the presumption that the location of a debtor’s registered office is its COMI.

The Canadian Court considered the facts submitted in support of the applications. All major business decisions, and the employee administration, human resource, marketing, and communications, pricing, accounts payable, accounts receivable, treasury functions and decisions were made in the U.S. by a team that managed the Chapter 11 Debtors, including the Canadian entities. All of the senior executives of the Chapter 11 Debtors, including the senior management of the Canadian entities, were resident of the U.S. The Canadian entities were wholly dependent on LSLP and other Chapter 11 Debtors located in the U.S. for all or substantially all of their funding requirements. The Canadian entities had also guaranteed on a secured basis that LSLP credit facilities. On the basis of these facts, the Canadian Court concluded that the COMI of the Canadian entities was located in the U.S.

In previous decisions, the Canadian courts have enumerated a list of ten factors to be considered in determining a debtor’s COMI. See, for example, our previous blog entry Elephant in Canada: Where is the COMI?, where the Canadian Court emphasized the importance of the three factors above, but also listed and considered those other factors. The focus of the enquiry to the three key considerations is a welcome clarification. It simplifies the factors for consideration in order to obtain an order that the foreign proceeding is a foreign main proceeding where the parties wish to rebut the presumption that the registered office of the corporation is not the COMI.

One can assume that foreign representatives in future cases will continue to provide a factual foundation for the other factors as well, given that the court is not limited to enquiring into the three enumerated factors. However, the clarification provided by this decision is useful to assist parties to focus on the three enumerated factors in setting the evidentiary foundation and submissions for Part IV applications.

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